Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Biden explained his plan for inflation. His excuses sounded like: “I ran out of gas. I had a flat tire. I didn’t have enough money for a cab fare. My tuxedo didn’t come back from the cleaners. An old friend came in from out of town. Someone stole my car. There was an earthquake, a terrible flood, and locust! I swear It isn’t my fault!! After blaming everything except his policies, he went on the bash oil companies, blaming them for gouging and not drilling on Federal leases, vowing new use it or lose it taxes. Oh I am sure that will inspire more investment in oil and gas.
He also blamed corporations in general for not paying their “fair share” of taxes which did not sit well with a stock market that is worried about the rising risks of a Biden recession. He said, “I plan to lower employer — lower everyday costs for — everyday costs for hardworking families and lower the deficit by asking large corporations and the wealthiest Americans to not engage in price gouging and to pay their fair share in taxes. What is he talking about?
The President even tried to take credit for his release from the strategic petroleum reserve even though it’s been an abysmal failure in its stated goal to bring down gasoline prices. Because he must buy that oil back and more than likely it will make prices higher than they would have been if he let the market work.
Yet worst of all, after bashing U.S. oil and gas companies, he doubled down on his green energy agenda promising more government spending in energy sources that are less efficient and thereby will be more inflationary. The President said that, “to reduce our dependence on foreign oil and reckless autocrats like Putin, I’m working with Congress to pass landmark investments to help build a clean energy future as well — from tax credits for businesses to produce renewable energy to tax credits for families to make their homes more energy-efficient.
Yet is that the right policy when the Wall Street Journal is warning that power grids across the nation are subject to failure because of their over-reliance on green energy. The Wall Street Journal reported that power-grid operators caution that electricity supplies aren’t keeping up with demand amid the transition to cleaner forms of energy. From California to Texas to Indiana, electric-grid operators are warning that power-generating capacity is struggling to keep up with demand, a gap that could lead to rolling blackouts during heat waves or other peak periods as soon as this year.
The Journal said that California’s grid operator said Friday that it anticipates a shortfall in supplies this summer, especially if extreme heat, wildfires, or delays in bringing new power sources online exacerbate the constraints. The Midcontinent Independent System Operator, or MISO, which oversees a large regional grid spanning much of the Midwest, said late last month that capacity shortages may force it to take emergency measures to meet summer demand and flagged the risk of outages. In Texas, where several power plants have lately gone offline for maintenance, the grid operator warned of tight conditions during a heatwave expected to last into the next week.
The risk of electricity shortages is rising throughout the U.S. as traditional power plants are being retired more quickly than they can be replaced by renewable energy and battery storage. Power grids are feeling the strain as the U.S. makes a historic transition from conventional power plants fueled by coal and natural gas to cleaner forms of energy such as wind and solar power, and aging nuclear plants are slated for retirement in many parts of the country.
The challenge is that wind and solar farms—which are among the cheapest forms of power generation—don’t produce electricity at all times and need large batteries to store their output for later use. While a large amount of battery storage is under development, regional grid operators have lately warned that the pace may not be fast enough to offset the closures of traditional power plants that can work around the clock. A must read in the Journal Archives.
Yet let’s get to markets. Yesterday’s onslaught in stocks bled into a massive risk-off mode that looks overdone at this time. One of the fears that the market has had on the oil demand side is the lockdown in China, but it seems that there are reports overnight that the lockdowns in China may be slowing because there’s a report that they had a decline of covid cases. If China does reopen, supplies are going to look a lot tighter very quickly. Also reports Ukraine has cut off gas supply to Europe and the energy supply in Europe is still precarious despite problems banning Russian oil and gas.
The American Petroleum Institute (API) did not inspire supply-side confidence because even with a reported 7-million-barrel release from the Strategic Petroleum Reserve, crude supply increased by a paltry 1.618 million barrels. The API also reported tiny increases in products with gasoline increasing by 823,000 barrels and distillates by 662.000 barrels. Not very comforting after AAA reported new record high prices for gasoline and diesel today. AAA puts regular unleaded gas at $4.404 and diesel at $5.553.
I believe yesterday’s sell off was a much-needed correction with prices getting closer to fair value and we took out some of the speculative fluff in prices. I believe that prices are near the bottom and if you have not hedged your position, this might be a good time to put those hedges on. As far as speculative positions, we think it’s a good time to put on positions as well as make sure you get hedge with options because of the extreme volatility we can talk about different strategies as well but this is probably a good time to start laying back into your long position.
Natural gas had one incredible day with a big selloff and a major snapback. One of the reasons was the Energy Information Administration’s Short Term Energy outlook showed that US natural gas supplies were below average and demand is soaring. The EIA said natural gas inventories ended April at 1.6 trillion cubic feet (Tcf), which is 17% below the five-year average. Inventories at the end of April were 190 billion cubic feet (Bcf) higher than at the end of March. This increase was below the five-year average as a result of below-normal temperatures that raised the demand for natural gas for heating amid relatively flat production.
The EIA said that U.S. consumption of natural gas will average 85.7 Bcf/d in 2022, up 3% from 2021. The increase in U.S. natural gas consumption is a result of colder temperatures and related higher consumption in the residential and commercial sectors in 2022 compared with 2021. We also expect the industrial sector to consume more natural gas in 2022 in response to expanding economic activity. In addition, forecast natural gas consumption in the electric power sector increases in 2022 because of limited natural gas-to-coal switching despite high natural gas prices. For 2023, we forecast natural gas consumption will average 85.3 Bcf/d, down 1%, mostly as a result of assumed milder winter temperatures (based on forecasts from the National Oceanic and Atmospheric Administration) that will reduce residential and commercial consumption.
The EIA reported that it expects natural gas inventories to increase by 418 Bcf in May, ending the month at 2.0 Tcf, which would be 14% below the five-year average for this time of year. EIA predicts that natural gas inventories will end the 2022 injection season (end of October) at almost 3.4 Tcf, which is 9% below the five-year average. However, summer temperatures will be key to storage, and a hotter-than-normal summer that results in high electricity demand could cause inventories to be lower than forecast and result in prices that are higher than forecast.
We expect the Henry Hub price to average $7.83/MMBtu in 2022 and an average of $8.59/MMBtu in 2H22. High forecast natural gas prices reflect our expectation that natural gas storage levels will remain less than the five-year (2017–2021) average this summer. Lower-than-average storage levels partly result from limited opportunities for natural gas-to-coal switching for power generation, which we forecast will keep the demand for natural gas for power generation high despite high prices. Natural gas prices could rise significantly above forecast levels if summer temperatures are hotter than assumed in this forecast and electricity demand is higher.
EIA expects that U.S. liquefied natural gas exports (LNG) will remain high during the summer. We expect the Henry Hub spot price will average $4.74/MMBtu in 2023. The forecast drop in prices for 2023 reflects our expectation that the rate of natural gas production will increase next year while LNG exports. We still have a bullish outlook for natural gas as well but be prepared for big swings.
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